Economy: a trillion reasons to be gloomy

America's financial television hosts have a new favourite question for their doom-mongering guests: any good news for our viewers? This is normally followed by a pause, then a reference to some dark corner of the financial universe.

After the collapse of the pound last week, Americans can look forward to cheaper trips to England. The plummeting global stock indices have created some real bargain stocks. Reykjavik property anyone?

But really, are there any reasons to be joyful? Or are we all justified in wandering around like characters in a Strindberg play? The short answer is yes, it really is that awful. And unless you have lots of cash, or even better, gold, it is going to be tough.

Britain's economy contracted by 0.5 per cent in the three months to September, the sharpest decline since the end of 1990. In the United States over the past two weeks, iconic firms such as General Electric, Coca Cola, Goldman Sachs and most of the airlines and car makers announced lay-offs.

Worldwide, $10tr has been wiped from the market value of shares over the past month. Stock markets over the past week were more volatile than they have been at any time since the Great Depression.

America's financial services firms are expected to cut 300,000 jobs in coming months, with 35,000 set to go in New York alone. Fashion journalists are reporting on the rise of 'recession chic' and frugal dressers known as 'recessionistas'. If there's a restaurant in Manhattan you always wanted to try, but could never get a table, now is your moment.

What is perhaps most frightening about this financial crisis is the extent to which it has come all at once. There do not appear to have been any equal and opposite reactions, no rises over here to compensate for falls over there.

Over the weekend, Kuwait's central bank halted trading in Gulf Bank, one of the country's largest lenders, after one of its clients defaulted on a large derivatives contract. The Saudis are dipping into their reserves to help people borrow for their businesses and important family celebrations.

The Russians and Venezuelans are now rueing all the cash they flushed away when oil sold for more than $100 a barrel, as its price has since fallen by a third.

The only winners in all this seem to be the clutch of hedge fund managers who shorted everything this year. When their astronomical returns are announced, they should beware a vicious public reaction.

At the Federal Reserve in Washington DC, billions of dollars in support for banks and firms hobbled by the credit crunch are now finally making their way into the system. There are signs that banks are starting to lend to each other again, if not to companies and ordinary consumers. But the Fed has no means to force them to lend, besides giving them a huge guilt trip.

Still, the Fed is far from done. It is expected to cut its short-term interest rate again on Wednesday, to levels last seen after 9/11. But will this, or Gordon Brown's nationalisation of Britain's banks and his promise to borrow his way out of the crisis, do anything to help?

The real challenge for governments is to restore trust in the financial system. There are trillions of dollars in investable cash sitting on the sidelines of the global economy today because investors, rightly, no longer trust what banks try to sell them. Until they do, the crisis will persist.

And some economists are now scarily saying that the problems in the United States and Britain are going beyond simple liquidity, the ability to meet one's short-term debt obligations, towards solvency, the ability ever to pay back one's debts. It seems extraordinary even to be discussing the notion of a bankrupt United States, but that is where we are. ·